When Lipstick Effects Meets Engel's Law: How Do Households Reallocate Spending across Economic Cycles?

Two theories predict different household responses during economic recessions. The Lipstick Effect predicts that consumers may preserve demand for small affordable luxuries that provide psychological comfort, while Engel’s law predicts that necessities become more important when resources are constrained. Using annual scanner data from the NielsenIQ Homescan Data, we estimate an Exact Affine Stone Index (EASI) demand system to examine how households reallocate spending across normal periods and two recession episodes: the Great Recession (2008–2009) and the COVID-19 recession (2020). The estimated own price elasticities are negative and inelastic for all seven products. Cross price elasticities show that staple foods tend to move together, especially eggs and milk, consistent with joint consumption within the household food basket. Expenditure elasticities are greater than unity for staple foods and below unity for cosmetics and other nonfood products, suggesting that additional within basket expenditure is allocated more strongly toward staples. In the recession analysis, lipstick shows a statistically significant Engel curve shift. During recession years, demand becomes less price elastic for lipstick, nail polish, air freshener, and eggs, while milk, face care, and bread become slightly more price responsive. Expenditure elasticities increase for lipstick, air freshener, and face care, whereas staple food expenditure elasticities change little across periods.